Deutsche Bank CDS hits four-year wides

3 min read
Helen Bartholomew

Credit default swaps referencing Deutsche Bank hit four-year wides this morning after plans to write down the value of its Postbank retail unit added to concerns surrounding the bank’s capital ratios and its ability to meet coupon payments on AT1 bonds.

Deutsche plans to write down the value of Postbank by a third ahead of a sale of the unit, Reuters reported yesterday. The sale, which forms part of a wider strategic overhaul and is intended to boost capital ratios, is expected in the next two years.

Five-year CDS spreads on the troubled German lender were quoted at 261bp earlier today, according to Markit pricing, more than double the level seen at the start of the year when contracts traded at 95bp.

The latest pricing sees the contracts precariously close to all-time wides of 296bp, which were recorded during the 2011 European debt crisis.

Deutsche’s CDS spreads pushed above 200bp this week for the first time since mid-2012 on concerns surrounding the bank’s ability to meet coupon payments on its AT1 bonds.

Tuesday’s comments from CEO John Cryan that the bank’s balance sheet was “rock solid” (see story) had little impact on CDS markets. Press reports of a planned buyback of senior debt (see story) sent the bank’s stock up by 10% on Wednesday, but CDS clawed back just 20bp on the news.

Deutsche’s stock reversed most of those gains this morning as it tumbled 7% to hit an intra-day low of €13.44.

Financials feel the heat

Financials have been among the top European CDS wideners so far this year on rising concerns over the health of the banking sector and disappointing fourth-quarter results from Deutsche and Credit Suisse.

The EuroStoxx Banks equity benchmark has shed 30% of its value since the beginning of 2016, taking bank stocks back to 2012 levels as investors become increasingly concerned by bail-in requirements, non-performing loans, emerging market exposures and Brexit risks for UK names, noted Bank of America Merrill Lynch credit strategist Ioannis Angelakis.

“With bank stocks at these levels, iTraxx Senior Financials will remain the key hedging instrument against increasing pressure in high-beta bank’s paper,” said Angelakis.

Markit’s iTraxx Senior Financials index of CDS on Europe’s 30 largest banking names has become the hedging instrument of choice, with spreads hitting three-year wides of 136bp this week – the highest level since the taper tantrum of 2013. The iTraxx subordinated financials index hit 310bp.

The magnitude of underperformance against non-financial names has become a pain trade for many high grade and high yield investors who heavily overweighted financials exposures at the start of the year following widespread analyst forecasts of financial sector outperformance.

“These positions have been impacted by the recent investor-unfriendly governmental intervention at Novo Banco, renewed concerns over growing NPLs in the Italian banking system, and fears over potential commodity-related loan losses,” said JP Morgan strategist Daniel Lamy in a report.

Holders of CDS referencing Novo Banco will find out on February 16 whether their contracts will pay out following the transfer of €2bn in senior bonds to bad bank Banco Espirito Santo.

An external review will be held on Friday to determine whether a governmental intervention credit event has occurred after ISDA’s credit determinations committee failed to reach the super-majority required to carry its 11-to-four vote against triggering CDS.